If you lend a friend or relative any amount, with an agreement that you will be repaid the capital plus interest, you cannot enforce that agreement in a court of law unless you are a registered credit provider.
A recent court case has reaffirmed this requirement of the National Credit Act (NCA). It applies even if the loan is a one-off action between people who know each other, and there is no threshold regarding the loan amount to which it does not apply.
In a blog for the Norton Rose Fulbright Financial Institutions Legal Snapshot newsletter, titled “Neither a borrower nor a lender be – the case of an unregistered credit provider”, associate attorney Boitumelo Ramokgopa describes a case to come before the Western Cape High Court in January.
In 2015, Mr A asked his long-standing friend, Mr B, to borrow money totalling R2.5 million. This was done in five instalments. After the first two instalments, totalling about R1.2m, Mr A drew up the first of three acknowledgements of debt. The second AOD acknowledged the entire amount.
Mr B stipulated that the capital amount be repaid within 45 days, and that interest would be 2.5% a month.
Over the next four years, Mr A paid R2.12m to Mr B, but a dispute arose over whether this had been interest or capital. In July 2019, Mr A signed the third AOD, acknowledging he owed Mr B R2.5m, assuming he had paid back most of the money. However, Mr B demanded that Mr A repay him the capital amount of R2.5m on top of the R2.12m he had paid.
When the dispute landed up in court, it turned out that Mr B had no case against Mr A (presumably now his former friend), because he had not registered as a credit provider.
Ramokgoba writes: “In its judgment, the High Court held that a simple loan by an individual which qualified as a credit agreement for the purposes of the National Credit Act (NCA) was unlawful and invalid because the lender was not registered as a credit provider.
“Section 8(4)(f) provides that an agreement in terms of which payment of an amount is owed by one person to another individual or small business, and there is a charge, fee or interest payable to the credit provider in terms of the agreement, constitutes a credit agreement.”
Essentially, the lender, in any agreement that falls under the realm of section 8(4) ought to be registered as a credit provider.
Some early court cases questioned the intention of the NCA, holding that it would reasonably apply only to credit providers who were participants in the credit market and not to one-off “arms-length” loans between friends or relatives. But the matter was finally put to rest by the Supreme Court of Appeal in the case De Bruyn NO and Others versus Karsten in 2017. It found that, despite the NCA’s apparent unreasonableness in cases such as these, the wording was clear and unambiguous.
In another blog: “The National Credit Act: he who ventures to lend, loses money and friend”, Rikus Scheepers, the director of Van Zyl Scheepers Attorneys in Stellenbosch, recommends you get legal advice before making a loan of any sizeable amount to someone you know. He writes: “When it comes to loans between friends, it may seem unnecessary to obtain legal advice because the loan is based on trust rather than contract. Unfortunately, trust is not enforceable.
“The determining factor is whether you, as the lender, derive some benefit from the loan. This can be in the form of interest, a charge or a penalty. It does seem unfair that you cannot provide for inflation, but the letter of the law is clear. If you want to escape the NCA, you have to let the interest go.”
Scheepers says most friendly loans work out, and issues with the NCA arise only when they don't.
He offers one other option when attempting to recover a loan: to institute a claim based on unjustified enrichment. “Unjustified enrichment means your friend was enriched at your expense. It does not mean that you can claim the interest with the amount you loaned to your friend and is limited to only the actual enrichment or impoverishment,” Scheepers says.
* Hesse is the former editor of Personal Finance
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